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Favorite Stock: Michaels Stores
graphic December 12, 2001: 1:06 p.m. ET

Postol: Strong sales and inventory control makes new NYSE component a value pick.
By Staff Writer Parija Bhatnagar
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    NEW YORK (CNN/Money) - One company in the business of making trends has also been bucking some recently, and consistently. Michaels Stores, the nation's leading arts and crafts retailer, is a blip on the retail sector radar for investors in search of a positive story.

    The Irving, Texas-based company was in the spotlight for more reasons than one Wednesday when it switched over to the New York Stock Exchange from the Nasdaq, where it will trade under the ticker MKE.

    "We think this move to the NYSE is prestigious," Michael Rouleau, Michaels' CEO, told CNNfn's Market Call. "We've been working through a turnaround and we've had four and a half years of earnings growth, at about 31 percent a year. We feel we're quietly building a retail powerhouse."

    Brian Postol, retail analyst, A.G. Edwards.
    While retailers continue to deliver disappointing sales results in the crucial holiday shopping season, Michaels is logging encouraging data, reporting a 35 percent increase in sales for the month of November to about $344 million from $256 million for the same period a year earlier.

    Michaels Stores is reaping the rewards from seeds sown by new leadership back in 1996, said Brian Postol, retail analyst with A.G. Edwards, when it implemented aggressive inventory control systems and invested in infrastructure over the past five years.

    The company also recorded a 20 percent rise in its third-quarter profit, boosted by a "nesting instinct" among American consumers desiring more time at home with the family following the Sept. 11 terrorist attacks. Postol forecasts an even stronger performance in the company's fourth quarter.

    Postol expands on why he favors Michaels Stores as his top stock.

    Why do you like Michaels Stores?

    The turnaround story which began in April 1996 with the hiring of new CEO Michael Rouleau continues to gain steam. His oversight into how to run a large-sized retailer in regards to systems development and efficiencies of merchandise distribution are just taking hold and should continue to benefit improved store productivity and operating profit margins.

    Who are its competitors, and what makes it a "winner" in its sector?

    A.C. Moore Arts & Crafts (ACMR: down $0.79 to $29.21, Research, Estimates); Hobby Lobby; Garden Ridge, and a lot of small mom and pop stores compete with Michael's.

    Michaels (MIKE: Research, Estimates) is a winner because of its size. Add up all of the other specialty retailers within this space and they don't get anywhere near the size of the company. Also, there's its national scope, with operating stores in 48 states and in Canada and Puerto Rico, and its systems implementations (automatic replenishment; testing of perpetual inventory).

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    The industry is roughly $11 billion in size. Over the past year, industry growth has begun to pick up from the relative benign growth of years past. Growth has been quite strong since the terror attacks on September 11th as consumers have flocked to stores looking for patriotic (red, white and blue) items such as ribbons, flags, etc., which introduced many new shoppers to this concept.

    What are your expectations for the stock going forward?

    For the holiday period and fourth quarter, we expect the company to beat current street consensus by a minimum of 5 cents a share. We are currently carrying a 98 cents a share estimate as compared to the street consensus of 93 cents a share.

    Michaels Stores CEO Michael Rouleau ringing the opening bell on the New York Stock Exchange.
    In fact, given the strong sell-through of Christmas products to date, coupled with last year's 280-basis-point contraction in gross margins due to heavy selling of clearance goods, we believe the ability to recoup all of this lost gross margin on solid comparable store sales could prove even our "street" high fourth-quarter estimate too conservative.

    With 700 stores currently in operation, we believe the potential for 1,200-plus stores is quite viable. Additionally, the continued benefits from past systems initiatives and further expansion of distribution capacity will help existing store productivity grow to the $4.5 million plateau from the current $3.5 million.

    Do you see any risks unique to the stock?

    In the past, the company has had inventory issues that have hampered earnings but came prior to this new management team's implementation of inventory systems. Over the coming years, Michaels will be expanding the number of distribution centers operated as well as embark on perpetual inventory -- the two of these initiatives do carry some execution risks that could disrupt the flow of goods to the stores.

    What is your financial interest in the stock?

    I do not have a personal interest in the stock; nor has A.G. Edwards participated in any offerings for this company.  graphic

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